Creditors’ suit cites warnings on LyondellBasell merger

Creditors’ suit cites warnings inside Basell

BRETT CLANTON, Copyright 2009 Houston Chronicle |
June 27, 2009

This LyondellBasell plant is in Channelview. The Netherlands-based company has more than 4,000 employees in the Houston area.

Dutch chemical giant Basell’s $12.7 billion buyout of Houston’s Lyondell Chemical Co. went forward in 2007 despite repeated warnings from the highest levels of Basell and its affiliates that the deal was too risky, according to sealed court documents obtained by the Chronicle.

A year later, in a move that was “entirely foreseeable,” the merged company filed for bankruptcy, buried in debt, starved for cash and overtaken by downturns in the chemical and refining industries Wall Street had seen coming, LyondellBasell creditors claim in a recently filed suit that includes the documents.

Internal skeptics of the merger feared the 100 percent debt-financed deal would saddle the new company with billions in debt and worried that financial projections about the combined company were intentionally inflated to help sell the deal to lenders, the sealed documents show.

Yet those concerns fell on deaf ears as the deal built momentum and as chief architects of the merger focused more on the millions they stood to gain if the deal was completed than on the long-term health of the new company, the documents claim.

The creditors’ suit was attached to a motion filed last week in LyondellBasell’s massive Chapter 11 case in U.S. Bankruptcy Court in the Southern District of New York. The Chronicle obtained copies of the unredacted version.

The motion asks Bankruptcy Judge Robert Gerber for permission to sue Leonard Blavatnik, chairman of Access Industries, a private equity firm that owns Basell, and itsaffiliates, as well as Wall Street banks that signed off on the merger that created LyondellBasell. It has more than 4,000 employees and seven manufacturing plants in the Houston area.

“Unsecured creditors were harmed by the way this merger was put together,” said John Elstad, a lawyer for the creditors with Brown Rutnick in Boston.

He otherwise declined to comment on allegations made in the redacted sections, which are still under court seal, or about broader claims in the lawsuit.

LyondellBasell lawyer Deryck Palmer also declined to comment, except to note that allegations in the suit are “only one side of the story.”

New details

A July 21 hearing has been set to determine if the lawsuit will go forward and whether sealed portions of the 140-page document will be made public.

Those redacted portions, now hidden by solid black lines in public court documents, provide new details about events leading up to the July 2007 merger agreement between Basell and Lyondell, the closing of the transaction several months later and the subsequent bankruptcy filing a year after that.

The story begins in April 2006, when Access Industries, the private equity parent of Basell, made an unsolicited offer for Lyondell of $24-$27 per share, a premium of about 10 percent over the stock price at the time. But then-Lyondell CEO Dan Smith told Access it would have to offer at least 20 percent premium for the board to consider it a serious offer.

At Access’ request, investment bank Merrill Lynch ran the numbers on a deal at $28 per share. It concluded the “timing was right” to acquire Lyondell — code-named Hugo for the purpose of the study. The bullish view emboldened Access to act.

Concerns surface quickly

Almost immediately, however, the proposal met skepticism within Access.

CEO Lincoln Benet raised concerns to Blavatnik, the billionaire chairman, about the combined company’s ability to fund operations and pay down merger-related debts if a downturn occurred in the refining and chemical businesses, a prospect then looking increasingly likely.

But Blavatnik pressed ahead. In August, Access made a formal offer of $26.50 to $28.50 per share, which Lyondell later rejected.

In early 2007, with Lyondell’s stock over $30, Blavatnik tried again. He proposed buying Lyondell for $35 to $38 per share, which Merrill Lynch again supported, given the availability of credit for such deals at the time and the potential for big returns to Access in a few years.

An April 10, 2007, presentation by Merrill to Access asked, “Why Hugo?” The answer: “Because you can.”

A Merrill Lynch spokesman declined to comment.

An Access spokesman declined to comment on specific charges in the lawsuit but in an e-mailed statement said the “economic environment and industry-specific dynamics in which the merger between Basell and Lyondell was completed was very different than today.”

New round of doubts

Inside Access, doubts surfaced again about the wisdom of a Lyondell acquisition, particularly at $38 per share.

“We are putting a lot of debt on the combined entity just because the financial markets will let us,” Ajay Patel, a vice president of mergers and acquisitions at Access, wrote in an e-mail at the time. “This may not be prudent in the long term.”

Volker Trautz, then CEO of Basell, went so far as to ask Blavatnik to give executives a chance to pull out their stock holdings in Basell if he was going to gamble with Basell’s equity and pursue Lyondell at such a high price.

But the price would go still higher. In June, Smith threw out $48 a share as a better asking price for Lyondell. And again Blavatnik agreed despite concerns by his team.

On July 17, Lyondell and Basell announced a merger agreement, with Merrill Lynch, Citibank and Goldman Sachs agreeing to fund the deal.

But things unraveled quickly. Rising crude prices boosted costs for the refining business, a weakening economy slowed demand for chemical products and the new company’s earnings fell, giving heartburn to banks that had agreed to finance the transaction.

Projections off

The deal was given a final push by Lyondell’s earnings projections for the rest of 2007 that later turned out to be much too high — projections the creditors’ suit called a “feat of reverse engineering.” The merger closed in December. When it did, Blavatnik received more than $300 million. Dan Smith, meanwhile, took home more than $56 million.

Just one year later, LyondellBasell placed all of its U.S. operations and a European holding company in bankruptcy protection. A reorganization plan is expected later this summer.